Munitions Industry Prepares for Downturn
By Bill Holmes and Rich Palachak
The munitions industry in recent years has seen increased budgets, mainly as a result of the demands of the wars in Iraq and Afghanistan.
Based on historical trends, a plausible assumption is that funding for ammunition procurement will decline dramatically in the next several years as U.S. forces withdraw from Iraq.
If budgets do decline, the continued existence of a viable and responsive U.S. munitions industrial base could be at risk, as has occurred in the past. As it also has been the case before, if industrial capabilities disappear following ammunition budget cuts, any rescue efforts will be expensive and create significant turbulence in the sector.
A preferred alternative would be purposeful actions taken now by the Defense Department and industry to ensure that the sector remains in good health and able to meet the nation’s needs.
The marketplace for the U.S. munitions base is principally the military establishment. Some sales, mostly small caliber ammunition, are made to the commercial sector while some portion of the munitions base output is sold to friendly foreign governments. But the largest consumer, by far, is the U.S. military. Annual production levels are dictated mainly by Defense Department and congressional budget decisions.
During periods of reduced defense spending, ammunition procurement funding has borne a disproportionate share of budget reductions. Ammunition procurement declined by nearly 80 percent between fiscal years 1985 and 1994, as a result of post-Cold War cutbacks. Little consideration was given to the effects of this funding decline on the long-term viability of the munitions base, and no planning was done to maintain munitions production capability for the longer term.
The result was a crippling of the industry. More than 75 percent of the companies included in the munitions industrial base in the mid-1980s exited the business by the mid-1990s and never returned. Total collapse was averted when the office of the secretary of defense directed yearly increases in the budget, and Congress added more funds above the budget submissions. After 9/11, ammunition procurement began to rise.
The munitions industrial base is composed of government facilities that are operated by government personnel, government facilities which are operated by contractors, large defense contractors and a wide array of small businesses. Such a diverse mix of assets complicates the policy formulation job of defense industrial planners. About 75 percent of the output of the munitions sector comes from private contractors.
Often in the past, ammunition procurement decisions have served to define and shape the industrial base. Losers of multi-year competitions and their suppliers, seeing no opportunities to compete for several years, may have no choice but to exit the industry. Fluctuating inventory levels and budget pressures can lead to procurement decisions that vary widely from year to year. These annual variations can force some small businesses, perhaps sole-source suppliers, to close their doors.
The Industrial Committee of Ammunition Producers, an NDIA organization that is composed of representatives from both industry and government, is assessing this situation and has coined the term “soft landing” for actions that can be taken to mitigate effects of the expected downturn in ammunition funding.
The Army’s single manager for conventional ammunition has launched efforts to identify required industrial base capabilities during the next five years and has developed management tools that can assess the impact of budget decisions.
Some of these management tools include:
- Munitions Readiness Reporting. This reporting system provides a rating for each Army ammunition item based on stockpile levels, quality of ammo in the stockpile, and an industrial base rating in order to give decision makers a heads-up on possible future problems.
- Industrial Base Sourcing Study. This document analyzes the munitions base production capabilities by product sector. The study identifies base capabilities that are over or under the capacity required during the next five years. This analysis provides industry with a reasonable basis for making capital investment or divestiture decisions.
- Industrial Base Assessment Tool. This is a database and simulation model that permits the government to identify the impact of a proposed budget on the munitions base for a specific key product area. The database includes information about all current munitions producers, their capacities, condition of facilities and viability rating.
- Minimum Sustaining Rate Database. It is a module within the industrial base assessment tool that allows the government to identify the impact of a proposed budget on a specific key facility in the base and to determine the minimum quantities needed to maintain a preset return on investment for the facility.
Section 806 of the fiscal year 1999 Defense Authorization Act permits the Army to restrict procurement actions to less than full and open competition as a way to protect the North American munitions industrial base. The military services are provided a “watch list” of munitions items that are determined to have a critical impact on the industrial base.
It is important also to have a protocol to ensure that these management tools are properly employed and the results are acted upon by the military services and the Defense Department. Government and industry must continue to work together to secure an industrial base characterized by a skilled work force, modern and efficient equipment and facilities capable of surge performance and financial incentives sufficient to persuade businesses to remain in the base.
The necessary tools are in place. Purposeful actions are now required to maintain a munitions industrial base that is capable of responding to the future munitions needs of the nation’s armed forces.Bill Holmes and Rich Palachak are members of the National Defense Industrial Association's Industrial Committee of Ammunition Producers.